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Monday, 5 October 2015

The copper market continues to feel the heat for the sustained weakness
in global economies. The scenario of declining demand from the major consuming
countries, increasing strength of dollar and below par performance of major
global economies of China, US and European Union continue to ascertain the fact
that this lull phase of the copper industry is likely to continue for a much
longer period than being expected by major participants. To analyse the above
situation in depth we need to assess the current demand and supply situation,
latest development in major economies and situation the currency market.

Like other beaten down commodities, copper has fallen victim to its own
success. Surging prices on the back of voracious demand from China’s then
double digit growth spurred mining companies to zealously crank up production.
The elevated production, combined with a Chinese economy in its fifth year of
decelerating growth, has created a supply glut that is unlikely to clear
anytime soon. Copper supply is forecast to run ahead of demand until at least
2019. While producers such as miner-cum-trader Glencore have announced plans to
scale back production and an 8.3 magnitude earthquake in Chile has disrupted
supply at some mines, the cuts will do little to soften the blow from softer
demand from China. Manufacturing continued to weaken in September, with the
Caixin Purchasing Manufacturers’ Index recording a preliminary reading of 47,
falling from a final reading of 47.3 in August. The China’s annual copper
demand growth is likely to slow to roughly 3 per cent till 2017 against the 9
per cent pace it averaged over the past five years. The sharp slowdown in
industrial activity in China is disastrous for copper producers, since China
consumes 45 per cent of their output. Its attempt to shift from an
investment-led economy to a consumer one has raised fears of a structural
decline in the amount of copper it will need. However much electrical wiring
there is in consumer goods, it does not match the vast tonnages consumed during
the recent decades of rapid urbanisation in the form of power lines,
telecommunications cables and the wiring of big apartment complexes. Power grid
investment, which accounts for around 30 per cent of Chinese copper
consumption, is expected to fall sharply in coming years as the expansion of
the electricity network is poised to slow significantly. China’s production of
consumer goods that contain large amounts of copper, such as refrigerators and
air conditioning units has also been disappointing this year and to add to it
the demand from most developed countries is expected to remain subdued. Amidst
the above developments the MINERS should prepare in advance for weak demand
from many traditional mainstays of copper consumption.

The latest supply situation suggests the surplus situation for the
industry. World mine production is estimated to have increased by 3 per cent
(280,000 MT) in the first half of 2015 compared with production in the same
period of 2014. The increase in world mine production was mainly due to a
recovery in production levels at mines in Indonesia and Chile, although the
latter also benefited from production at mines that started last year.
Aggregated production in these two countries increased by 6 per cent.
Production in Peru increased by 8 per cent and in the United States and China,
production declined by 4 per cent and 3 per cent, respectively. World refined
production is estimated to have increased by 3 per cent (350,000 MT) in the
first half of 2015 compared with refined production in the same period of 2014.
The primary production was up by 2 per cent and secondary production (from
scrap) was up by 8 per cent. The main contributor to growth was China (up by 5
per cent), followed by the Philippines and Indonesia where production was
reduced in the first quarter of last year due to operational constraints.
Production also increased in the DRC (+11 per cent). Output in Chile and Japan
(the second and third leading refined copper producers) declined by 2.5 per
cent each, while in the United States (the fourth largest producer of refined
copper), production dropped by 6 per cent. The average world refinery capacity
utilization rate for the first half of 2015 increased slightly to 82 per cent
from 81 per cent in the same period of 2014.

By the first half of 2015, world apparent usage is estimated to have
declined by around 2 per cent (245,000 MT) compared with that in the same
period of 2014. Chinese apparent demand declined by around 1 per cent based on
a 10 per cent decrease in net imports of refined copper from the high net
import level in early 2014 and consequently higher apparent usage. Excluding
China, world usage declined by around 3 per cent in the first half of 2015
mainly due to a decline of 53 per cent in Russia’s apparent usage and a decline
of 8 per cent and 5 per cent in Japan and the EU, respectively.

In spite of increased supply of bearish news, the positive development
in the consuming countries is likely to sustain the prices for the short run (3
to 6 months henceforth). Japan's factory output unexpectedly fell for the
second straight month in August, fuelling worries that a prolonged slump could
quash an unsteady economic recovery and raising expectations of fresh stimulus
from the Bank of Japan to reignite growth. U.S. consumer confidence rose and
was higher than expected in September. China has also decided to halve sales
tax on small cars from 1st October 2015, boosting local auto shares, as the
government tries to revive growth in the world's largest car market. This move
from China is expected to trigger car production recovery, which in turn will
support demand for copper and steel. This is just one more example of
supportive Chinese fiscal policy, which could see commodities’ demand
cyclically improve over the coming three to six months. As per estimates,
transportation accounts for 10 percent of China copper demand. A 2-percent
increase in auto sales would push up copper demand by 37,000 tonnes this year,
100,0000 tonnes next year and 166,000 tonnes in 2017. Chile's second-biggest
copper mine Collahuasi, owned by London-listed Anglo American and Glencore,
said this week it planned to cut output by 30,000 tonnes. That is not a large
amount in a market estimated at around 23 million tonnes this year, but it adds
to recent announcements about output cuts and reinforces expectations of miners
taking out more capacity which would in-turn reduce the supply of copper from
the main stream leading to further support to the prices.

The overall short term investment sentiments in
the red metals continues to be gloomy, but if one think of investing with the time
line of over 3-4 years, this is certainly a time to enter with at least a
investment exposure of about 20 per cent of the whole portfolio.